Optimal Procurement with Quality Concerns (original) (raw)
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An Experimental Study of Procurement Auctions with Endogenous Minimum Prices
RePEc: Research Papers in Economics, 2010
Several European countries and many Japanese local governments began including endogenous minimum prices (EMPs) in rst-price auctions (FPAs) in their public procurements. The EMP is calculated based on its relation to the average of all bids or to some lowest bids. Any bid lower than the EMP is considered abnormally low and is excluded from the procurement procedure. Producers who join this new auction institution have the incentive to raise their bids and pull up the EMP in order to exclude others. A theoretical analysis reveals that the EMP does not affect winning bids but changes the Nash equilibria of the standard FPA that does not have any minimum prices. A laboratory analysis reveals that the winning bids of this new auction institution (i) are close to the production cost and coincide with those of the standard FPA under the identical cost condition and (ii) are higher than the lowest production cost and those of the standard FPA under our different cost condition when subjects' identi cations and bids are revealed.
On the Value of Competition in Procurement Auctions
Econometrica, 2002
It is commonly stated that ascending price or second price auctions allocate goods e±ciently, to those who value them most. This implies that the more bidders at the auction stage the more e±cient the¯nal allocation. We review this statement when bidders have private information both on a private element and a common element. While the¯nal allocation need not be ex post e±cient, we show that when bidders are ex ante symmetric, more competition at the auction yields higher e±ciency on expectation. When bidders are ex ante asymmetric-in particular with respect to the information on the common element-the statement need no longer be true.
2007
Several Japanese local governments started to add endogenous minimum prices to first-price auctions in their public procurements. Any bid less than the endogenous minimum price is referred to as abnormally low and is excluded from the procurement procedure. The endogenous minimum price is generally calculated as 80 % to 90 % of the average of some of the lowest bids or all bids. Therefore, producers who join this new institution have incentives to raise their bids and pull the endogenous minimum price to exclude others. We experimentally evaluate the performance of this new institution relative to the standard first-price auction which do not have any minimum price. We find that winning prices of this new institution (i) coincide with the ones of the standard first-price auction and are close to the production cost under our identical cost condition, and (ii) are higher than the ones of the standard first-price auction and diverge from the lowest production cost under our different ...
Procurement when price and quality matter
Rand Journal of Economics, 2010
A buyer seeks to procure a good characterized by its price and its quality from suppliers who have private information about their cost structure (fixed cost + marginal cost of providing quality). We solve for the optimal buying procedure, i.e. the procedure that maximizes the buyer's expected utility. We then use the optimal procedure as a theoretical and numerical benchmark to study practical and simple buying procedures such as scoring auctions and negotiation. Specifically, we derive the restrictions that these simpler procedures place on allocations and compare them with the optimal allocations to generate insights about the properties of these simpler procedures and identify environments where they are likely to do well. We also use the optimal procedure benchmark to compare the performance of these procedures numerically. We find that scoring auctions are able to extract a good proportion of the surplus from being a strategic buyer, that is, the difference between the expected revenue from the optimal mechanism and the efficient auction. Sequential procedures (to which many negotiation processes belong) do less well, and, in fact, often do worse than simply holding an efficient auction. In each case, we identify the underlying reason for these results.
Renegotiation and Discrimination in Symmetric Procurement Auctions
In order to make competition open, fair and transparent, procurement regulations often require equal treatment for all bidders. This paper shows how a favorite supplier can be treated preferentially (opening the door to home bias and corruption) even when explicit discrimination is not allowed. We analyze a procurement setting in which the optimal design of the project to be contracted is unknown. The sponsor has to invest in specifying the project. The larger the investment, the higher the probability that the initial design is optimal. When it is not, a bargaining process between the winning firm and the sponsor takes place. Profits from bargaining are larger for the favorite supplier than for its rivals. Given this comparative advantage, the favored firm bids more aggressively and then, it wins more often than standard firms. Finally, we show that the sponsor invests less in specifying the initial design, when favoritism is stronger. Underinvestment in design specification is a t...
Budget Feasible Procurement Auctions
Operations Research, 2018
We consider a simple and well-studied model for procurement problems and solve it to optimality. A buyer with a fixed budget wants to procure, from a set of available workers, a budget feasible subset that maximizes her utility: Any worker has a private reservation price and provides a publicly known utility to the buyer in case of being procured. The buyer’s utility function is additive over items. The goal is designing a direct revelation mechanism that solicits workers’ reservation prices and decides which workers to recruit and how much to pay them. Moreover, the mechanism has to maximize the buyer’s utility without violating her budget constraint. We study this problem in the prior-free setting; our main contribution is finding the optimal mechanism in this setting, under the “small bidders” assumption. This assumption, also known as the “small bid to budget ratio assumption,” states that the bid of each seller is small compared with the buyer’s budget. We also study a more gen...
On Discrimination in Procurement Auctions
CEPR Discussion Paper Series, 2014
With exogenous participation, strong bidders should be discriminated against weak bidders to maximize revenues (Myerson 1981). When participation is endogenous and the set of potential entrants is large, optimal discrimination if any takes a very different form. Without incumbents, there should be no discrimination even if entrants come from groups with different characteristics. With incumbents, those should be discriminated against entrants no matter how strong/weak they are even if some share of their surplus is internalized by the designer. The optimal reserve policy in standard auctions is also analyzed to shed light on situations in which discrimination is not permitted.
Comparing public procurement auctions
International Economic Review, 59(2), 391-419, 2018
This article contrasts two auction formats often used in public procurement: first price auctions with ex post screening of bid responsiveness and average bid auctions (ABAs), in which the bidder closest to the average bid wins. The equilibrium analysis reveals that their ranking is ambiguous in terms of revenues, but the ABA is typically less efficient. Using a data set of Italian public procurement auctions run alternately under the two formats, a structural model of bidding is estimated for the subsample of first price auctions and used to quantify the efficiency loss under counterfactual ABAs.
Favoritism in Repeated Procurement Auction PRELIMINARY
2004
In this paper, we investigate the interaction between two firms engaged in a repeated procurement relationship modelled as a multiple criteria auction, and a procurement official (agent) whose duty is to decide on a scoring rule. We find that with favoritism, the procedure selects projects with an extreme design. In the one-shot game, the equilibrium bribe is maximal when the cost of favoritism is zero. As the cost increases, competition for favors weakens. When the firms meet repeatedly on different markets, the optimal collusive scheme, in the absence of corruption, entails an allocation rule contingent on firms ’ costs and on the government’s preferences. Our main finding is that with corruption a non-contingent allocation rule where firms take turn in winning independently of the true government preferences and the firms ’ costs is ex-post efficient. The ‘environment ’ adapts to the cartel: in equilibrium, the contract is fine-tailored to the in-turn winner. Favoritism not only ...